The change in banks' product mix, diversification and performance: An application of multivariate GARCH to Canadian data
Data suggest a change in banks’ performance attributable to a greater involvement in non-traditional activities. Indeed, market-oriented banking increases banks’ accounting returns at the cost of a higher volatility in financial results. The motivation of this paper is to study how bank product mix impacts diversification and performance. Thanks to our data and methodology we are able to shed new light on the apparently contradictory results found in the literature regarding the benefits to diversify in market-based banking. Some keys conditional volatilities reveal these benefits may in fact vary both over the business cycles and through time. Using a new framework based on a multivariate GARCH procedure and a modified Hausman test, our main findings suggest that most components of non-interest income actually provide non-negligible diversification benefits with respect to traditional banks’ business lines. In normal times, diversification even works for the components most related to market-oriented banking, i.e., trading income and capital markets fees. Not so surprisingly however, during crisis episodes these diversification benefits seem to vanish for most of the components, except for insurance and securitization, which act as buffers. Consistent with the literature, we also find that, despite the evolution of the banking business model, fees related to banks’ traditional activities – deposit, credit card and loan fees – remain the most stable and profitable sources of income.
|Date of creation:||01 Jan 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (819) 595-3900
Fax: (819) 773-1747
Web page: http://www.repad.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fran�ois-�ric Racicot & Raymond Théoret, 2012. "Optimally weighting higher-moment instruments to deal with measurement errors in financial return models," Applied Financial Economics, Taylor & Francis Journals, vol. 22(14), pages 1135-1146, July.
- Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
- Robert DeYoung & Tara Rice, 2004. "Noninterest Income and Financial Performance at U.S. Commercial Banks," The Financial Review, Eastern Finance Association, vol. 39(1), pages 101-127, 02.
- Kevin J. Stiroh, 2002.
"Diversification in banking: is noninterest income the answer?,"
154, Federal Reserve Bank of New York.
- Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-82, October.
- Christian Calmès & Raymond Théoret, 2009.
"The Impact of Off-Balance-Sheet Activities on Banks Returns: An Application of the ARCH-M to Canadian Data,"
RePAd Working Paper Series
UQO-DSA-wp032009, Département des sciences administratives, UQO.
- Calmès, Christian & Théoret, Raymond, 2010. "The impact of off-balance-sheet activities on banks returns: An application of the ARCH-M to Canadian data," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1719-1728, July.
- Simon H. Kwan & Elizabeth S. Laderman, 1999. "On the portfolio effects of financial convergence - a review of the literature," Economic Review, Federal Reserve Bank of San Francisco, pages 18-31.
- Lepetit, Laetitia & Nys, Emmanuelle & Rous, Philippe & Tarazi, Amine, 2008. "Bank income structure and risk: An empirical analysis of European banks," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1452-1467, August.
- De Jonghe, Olivier, 2010.
"Back to the basics in banking? A micro-analysis of banking system stability,"
Journal of Financial Intermediation,
Elsevier, vol. 19(3), pages 387-417, July.
- O. De Jonghe, 2009. "Back to the Basics in Banking? A Micro-Analysis of Banking System Stability," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/579, Ghent University, Faculty of Economics and Business Administration.
- Olivier De Jonghe, 2009. "Back to the basics in banking ? A micro-analysis of banking system stability," Working Paper Research 167, National Bank of Belgium.
- De Jonghe, O.G., 2009. "Back to Basics in Banking? A Micro-Analysis of Banking System Stability," Discussion Paper 2009-45 S, Tilburg University, Center for Economic Research.
- Rebecca S. Demsetz & Philip E. Strahan, 1995. "Diversification, size, and risk at bank holding companies," Research Paper 9506, Federal Reserve Bank of New York.
- Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
- Campa, Jose M. & Kedia, Simi, 2000.
"Explaining the diversification discount,"
IESE Research Papers
D/424, IESE Business School.
- Gallo, John G. & Apilado, Vincent P. & Kolari, James W., 1996. "Commercial bank mutual fund activities: Implications for bank risk and profitability," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1775-1791, December.
- Christian Calmès & Ying Liu, 2005.
"Financial Structure Change and Banking Income: a Canada-U.S. Comparison,"
RePAd Working Paper Series
UQO-DSA-wp0302005, Département des sciences administratives, UQO.
- Calmès, Christian & Liu, Ying, 2009. "Financial structure change and banking income: A Canada-U.S. comparison," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 128-139, February.
- Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
- Laeven, Luc & Levine, Ross, 2007.
"Is there a diversification discount in financial conglomerates?,"
Journal of Financial Economics,
Elsevier, vol. 85(2), pages 331-367, August.
- Luc Laeven & Ross Levine, 2005. "Is There a Diversification Discount in Financial Conglomerates?," NBER Working Papers 11499, National Bureau of Economic Research, Inc.
- Laeven, Luc & Levine, Ross, 2005. "Is There a Diversification Discount in Financial Conglomerates?," CEPR Discussion Papers 5121, C.E.P.R. Discussion Papers.
- Schmid, Markus M. & Walter, Ingo, 2009. "Do financial conglomerates create or destroy economic value?," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 193-216, April.
- Kroszner, Randall S & Rajan, Raghuram G, 1994. "Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933," American Economic Review, American Economic Association, vol. 84(4), pages 810-32, September.
- Slijkerman, Jan Frederik & Schoenmaker, Dirk & de Vries, Casper G., 2013. "Systemic risk and diversification across European banks and insurers," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 773-785.
- DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January.
- Christian Calmès, 2004.
"Regulatory Changes and Financial Structure: The Case of Canada,"
Swiss Journal of Economics and Statistics (SJES),
Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 1-35, March.
- Christian Calmès, 2004. "Regulatory Changes and Financial Structure: The Case of Canada," Working Papers 04-26, Bank of Canada.
- Estrella, Arturo, 2001. "Mixing and matching: Prospective financial sector mergers and market valuation," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2367-2392, December.
- Goddard, John & McKillop, Donal & Wilson, John O.S., 2008. "The diversification and financial performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1836-1849, September.
- Busch, Ramona & Kick, Thomas, 2009. "Income diversification in the German banking industry," Discussion Paper Series 2: Banking and Financial Studies 2009,09, Deutsche Bundesbank, Research Centre.
- Kevin Stiroh, 2006. "New Evidence on the Determinants of Bank Risk," Journal of Financial Services Research, Springer, vol. 30(3), pages 237-263, December.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
When requesting a correction, please mention this item's handle: RePEc:pqs:wpaper:012013. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Calmes)
If references are entirely missing, you can add them using this form.